EZCORP, Inc. — Form 10-Q summary
Business and period: EZCORP provides pawn loans and sells forfeited collateral and other pre-owned merchandise in the U.S. and Latin America. This report covers the fiscal third quarter and nine months ended June 30, 2022; amounts below are in U.S. dollars unless stated otherwise. The quarter was seasonally a lower-PSC period. Results are unaudited.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $215.8 million | $174.0 million | $652.8 million | $537.1 million |
| Gross profit | $129.5 million | $108.0 million | $390.5 million | $330.2 million |
| Operating income | $13.6 million | $3.7 million | $60.0 million | $23.4 million |
| Net income (loss) | $12.2 million | $(2.6) million | $42.8 million | $7.1 million |
| Diluted EPS | $0.17 | $(0.05) | $0.59 | $0.13 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $48.5 million | $33.1 million |
Margins: Gross margin was approximately 60.0% in the quarter versus 62.1% a year earlier; operating margin was 6.3% versus 2.1%, and net margin was 5.7% versus negative 1.5%. For the nine months, gross margin was 59.8% versus 61.5%, operating margin 9.2% versus 4.4%, and net margin 6.6% versus 1.3%.
Balance sheet and liquidity: At June 30, cash and cash equivalents were $222.3 million and restricted cash was $8.6 million. Current assets were $629.6 million and current liabilities $144.9 million. Long-term debt, net, was $312.5 million, representing $316.25 million principal of convertible notes due in 2024 and 2025. Total lease liabilities were $228.8 million. Shareholders’ equity was $685.8 million.
Cash flows: Nine-month investing cash outflow was $81.6 million, principally reflecting increased net pawn lending, capital spending, and investments; financing cash outflow was $0.8 million. Cash, cash equivalents and restricted cash declined $32.7 million to $231.0 million. Management said available capital and projected operating cash flow were adequate for anticipated needs, including fiscal 2022 growth, spending and debt service.
Changes and operating drivers
- Quarterly revenue rose 24% and net income improved from a loss, while nine-month revenue rose 22% and net income increased to $42.8 million. Segment contribution increased 68% for the quarter and 49% for the nine months.
- Pawn service charges increased 33% in the quarter to $80.3 million and 24% year to date to $233.0 million, driven by higher pawn-loan balances. Management said pawn loans outstanding exceeded pre-pandemic levels and were at record levels in both U.S. and Latin America operations.
- Merchandise sales grew, but merchandise gross margins declined as margins returned toward more normal levels: U.S. quarterly margin was 41% versus 46%; Latin America was 29% versus 35%. Store expenses increased with business activity, labor costs and store growth.
- At June 30, the company operated 1,163 stores, up from 1,143 a year earlier. It opened 12 Latin America stores in the first nine months and acquired three U.S. stores.
- Operating cash flow improved year over year, while investing outflow increased. The company invested $15 million in Founders One and increased its Cash Converters ownership to 40.67%.
Outlook, accounting, risks and contingencies
- No specific revenue, earnings or other numerical guidance was provided. Management expects higher pawn-loan balances to support accelerating pawn service-charge revenue in coming quarters, reflecting the lag between originations and fees. It cautioned that historical seasonality may return.
- Management cited continuing COVID-19 effects, including store staffing challenges. Other relevant exposures include foreign exchange, interest rates, gold and jewelry values, regulation, and the ability to assess collateral values and sell inventory efficiently.
- EZCORP early adopted ASU 2020-06 on October 1, 2021. The accounting change reduced reported interest expense by $3.5 million for the quarter and $10.3 million year to date, with no cash-flow or liquidity impact. It also changed diluted EPS to the if-converted method; the notes added 25.2 million shares to the diluted calculation. The company reported 2022 quarterly diluted EPS of $0.17 versus basic EPS of $0.22.
- A Florida text-message class action settlement requires up to $5 million for verified claims, attorneys’ fees and costs. The company recorded an estimated liability in the quarter; preliminary court approval came July 22, 2022, and final approval remained outstanding when reported.
- The board authorized up to $50 million of share repurchases over three years; none had been made by June 30, 2022. Management noted that future repayment of the 2024 and 2025 notes may require refinancing or new financing, depending on circumstances.
- Disclosure controls were reported effective as of June 30, 2022, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track pawn-loan growth, redemption rates and service-charge conversion: U.S. quarterly redemption was 85% versus 88% a year earlier; Latin America was 79% in both periods.
- Assess whether merchandise margins stabilize after the reported declines and whether inventory growth and turnover remain manageable.
- Review the final approval and claims experience for the settlement, including whether ultimate costs differ from the recorded estimate.
- Separate operating performance from the non-cash interest benefit and diluted-share effects of ASU 2020-06 when evaluating earnings and EPS.
- Monitor cash use, planned repurchases and investment performance, alongside refinancing needs for the 2024 and 2025 convertible notes.